Question

You have purchased a put option on Kimberly Clark common stock. The option has an exercise price of $83 and Kimberly Clark’s stock currently trades at $84.18. The option premium is $1.50 per contract. One option equals 100 shares of the underlying stock.

a. Calculate your net profit on the option if Kimberly Clark’s stock price falls to $81 and you exercise the option. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations.)
b. Calculate your net profit on the option if Kimberly Clark’s stock price does not change over the life of the option. (Negative amount should be indicated by a minus sign.)

Answer 1

a: Profit on put option = (Exercise price-Market price)*No of shares - option premium

= (83-81)*100-1.5*100

= $50

b: Since the market price is more than the exercise price, the option will not be exercised.

Profit on put option = - option premium

= -1.5*100

= -150